May 17, 2023
Fortune recently published an article featuring Mark Williams, Master Lecturer of Finance, discussing the financial impact of failing to raise the debt ceiling and how CFOs can prepare for that outcome.
The White House and Congress have not reached an agreement on raising the U.S. debt limit. As soon as June 1, the U.S. may be unable to pay its bills and default on its debt. In January, the federal government reached its $31.4 trillion debt limit.
Williams predicts, “If politicians can’t come to an agreement, then that could be the final push that moves us into recession. The short-term impact would be an increase in interest rates and an increase in the cost of capital for corporations.”
The damage to U.S. businesses and the economy will start before a technical default, according to executives at Bank of America, JPMorgan Chase, and Citigroup. To prepare, financial institutions are already accumulating expenses, and assigning workers and executives – including heads of trading, corporate banking, and consumer banking – to study the effects of a government shutdown on the financial markets. Scenario planning and creating a cash flow model with high recurring revenue are essential. Williams says, “This is a politically-made financial storm that should be avoided at all costs. To lose credibility in the global capital markets would be devastating to the U.S. and would cost trillions of dollars. And it would also have a ripple effect on the global economy, and U.S. corporations.”